We came across a bearish thesis on Goosehead Insurance Inc. (NASDAQ:GSHD) on ValueInvestorsClub by BulldogRob123. In this article, we will summarize the bears’ thesis on GSHD. The company’s shares were trading at $86.04 when this thesis was published, vs. the closing price of $106.81 on Jan 03.
Insurance house, car and family health live concept. The insurance agent presents the toys that symbolize the coverage.
GSHD engages in the provision of personal lines insurance agency services in the United States. The insurance products and services provided include homeowner’s, automotive, dwelling property, flood, wind, earthquake, excess liability or umbrella, motorcycle, recreational vehicle, general liability, property, and life. GSHD collects 8-13% as commission from the sale of insurance products.
The biggest concern is the franchise business, which brings in 80% of new commissions and 50% of renewal commissions. The franchise business has been instrumental in generating a topline annual growth of 35% but it has seen a decline in the last two quarters. In the latest quarter, 365 experienced franchises left the system, reflecting a 26% decline. The projected consensus growth of 15% in 2024 and 30% in 2025 is highly optimistic, even if it factors in a net addition of 80 and 130 in these years.
Commission rates on home insurance in Texas are expected to decline as natural disasters have made these policies unprofitable for insurers. A 2% cut in renewal commissions could cut franchise revenues by 15% for GSHD. The client retention rate has also fallen in Texas due to an increase in home/auto prices that is twice the national average. This is the primary reason why the retention rate has dropped from a historical level of 89% to 85% in Q1-24. Texas will continue to be a difficult market on account of an increase in the frequency of natural disasters (4 per year in 1980-2023 to 16 in 2023).
The business outlook provided by the management has also not been reliable in recent quarters. The prediction on franchise churn rate was understated, with the franchise count down by 71. The management had actually forecasted a growth in Q1-24. Employee compensation as a percentage of revenue also has been up, not as envisaged by the top executives. With a clear business strategy and unmet expectations, there could be pressure on the stock price.
While we acknowledge the potential of GSHD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GSHD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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